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Ranbaxy R&D spin-off

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Cost savings may be factored in

BL Research Bureau

Ranbaxy’s board on Tuesday cleared the scheme of de-merger of its New Drug Discovery Research (NDDR) unit, which is expected to result in cost savings of $25 million (approx. Rs 100 crore) for the parent company in 2008. The stock reacted positively to the news, ending 4.8 per cent higher compared to Monday.

While the earnings from the NDDR entity may be difficult to predict at this juncture, the cost savings from the demerger seems to have been factored into the full-year guidance for Ranbaxy already announced by the management. The guidance was for earnings before interest, taxes, depreciation and amortization margins of 17.5-18 per cent to sales. Investors will be looking at cost savings from the hive off of R&D to give a fillip to the net profit margin that was at 8.4 per cent in 2007, as 2008 seems to be bereft of any exclusive launches for Ranbaxy (going by current information).

R&D pipeline

The NDDR unit, which will be housed in Ranbaxy Life Science Research, will focus on select therapeutic segments of infectious and metabolic diseases, inflammatory/respiratory disease and oncology. The company has eight-10 programmes in the area of NDDR, including one molecule in phase-II clinical trials, one in phase-I and the rest mostly in the pre-clinicals. Discovery research being time-intensive exercise, earnings visibility is not expected in the near-term, without any out-licensing deal. Optimistically, Ranbaxy’s anti-malarial drug (in phase 2B) is supposed to hit the market by 2010-11. Ranbaxy is yet to reveal full pipeline details but the NDDR unit is working on two programmes in the respective areas of Chronic Obstructive Pulmonary Disease and anti-infectives segment.

Under the scheme, the shareholders of Ranbaxy will be entitled to receive one equity share of Re.1 each of RLSRL for every four equity shares of Rs 5 each held in Ranbaxy, as on the record date, after receipt of requisite approvals. All approvals required for the scheme to come into effect are expected after June.

(This article was published in the Business Line print edition dated February 20, 2008)
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